We are all aware that interest rates are high when compared to the low rates in 2020/2021. Rising interest rates are the Federal Reserves response to cool down inflation. Although unfortunately for homebuyers, a higher rate translates into a higher monthly mortgage. This affects overall affordability, but there are a few surprising advantages to a cooling market. These advantages will help you get your foot in the door to homeownership and will also directly set a hedge against inflation. 

Benefit 1: Decreasing Home Prices  

When interest rates were low, there were too many buyers competing for a historically low inventory of homes for sale. You’ve probably heard about multiple offers over asking price being the norm. Supply and demand were out of control in that crazy market. And although so many homebuyers locked in a low interest rate, they overpaid way over the appraisal value of the homes worth. 

But to your benefit, rising interest rates have helped rectify that issue. Having higher interest rates reduces the number of buyers who qualify for a mortgage loan, therefore reducing the competition for homes. 

Higher rates have 2 effects on the housing market that help drive down prices:

1. They price some buyers out of the market, which is good for those who remain 

2. It has the effect of putting downward pressure on housing prices, which is great for buyers

Benefit 2: Less Buyer Risk

When interest rates were low buyers were competing and chasing a limited supply of homes, a lot of buyers were waiving offer contingencies. Why? Because offers with fewer contingencies present a better chance of your offer being chosen by the seller.

However, among the contingencies that were being waived included two important ones: The inspection and the appraisal. With the market evening out now, inspection and appraisal contingencies are re-emerging. Here's why that's a good thing for you as a buyer.

The Inspection: 

Purchasing a home involves a lot of unknowns which has risks. You’re buying a tangible asset that’s subject to wear and tear. 

In a normal market, the buyer requires an opportunity to inspect the home. If they don’t like what the inspection shows, as a buyer they can back out of the contract. This gives you a lot of security as the buyer. 

This is an important step to understanding what you’re buying. A licensed inspector will provide details on the age and the condition of important structural and mechanical things that a homebuyer needs to know. How many years of life is left on the roof? Is the HVAC system functioning properly? Does the foundation have a crack that threatens the home’s stability?

Buyers and agents are not expected to know or are trained to see these things, but an inspector is. While the results of an inspection is not normally an opportunity for renegotiation of offer price, it can definitely serve that purpose. All this to say, inspecting a home is a crucial step in the homebuying process and as a buyer you now have the ability to do so rather than waiving that right when interest rates were low. 

The Appraisal: 

When interest rates were low, sellers favored cash buyers and buyers with a substantial down payment saved. That’s because bidding wars were pushing prices over the seller's asking price. This often meant the home would not be appraised for the offer price.

For borrowers, that’s a problem. When securing a mortgage, the lender often requires a well-researched value assessment by an independent licensed appraiser. This is because they want to ensure the home is worth the amount of money they agree to finance.

As a result, only buyers with additional cash to pay the difference between offer price and appraised price were able to compete, as sellers would only accept an over asking price offer if the buyer could sign an appraisal gap addendum. In today’s market, we do not see this happening as often as it did back then. 

Benefit 3: 2/1 Buy-Down Loan Program 

Buying a home while interest rates are high is all about affordability. The 2/1 buy-down loan program literally lowers your interest rate, at no cost to you as the buyer. And now more than ever, sellers are willing to credit you this buy-down program to lower your interest rate, which is the biggest advantage in today’s market. 

What is it?  

A 2/1 buy-down means that as a buyer, your mortgage interest rate starts 2% below the actual rate for the first 12 months in the home, and 1% below the actual rate for the next 12 months (2nd year in the home). Once you get to the 3rd year in the home, the rates go back up to the original interest rate at the time of purchasing the home but the whole idea behind this program is that the interest rates naturally go down and at that point you can refinance, locking in a lower rate. 

Benefits: 

• Seller funded: when submitting an offer on a home, you negotiate for the seller to credit you a certain fee to buy down the rate so you can take advantage of this program. Meaning as a buyer you do not pay to buy-down your interest rate, the seller does. 

• After the 2 year buy-down, this loan will be a 30 year fixed

• Unused buy-down funds are refunded to seller if refinance/sold within the first 2 years

• 2/1 buy-down does NOT increase the loan costs to buyers 

• Conventional, FHA & VA loans are eligible 

Qualifications:

• Must qualify at Note Rate without the benefit of the buy-down

• Must be owner-occupied - purchase transactions only 

• Must meet all other agency guidelines- Fixed Rates only

In Conclusion

It’s natural to think of rising interest rates as bad news for homebuyers. But that doesn’t mean there’s no silver lining to buying when rates are high. There’s likely to be less buyer competition for the home you want, lower home prices, less buyer risk, and interest rate buy-down programs available to you.

And, remember, you can always refinance when rates come down again. The bottom line? If you are ready to become a homeowner, don’t let higher interest rates put your home buying plans on hold. You're always better off spending time in the market rather than trying to time the market. 

Let’s get you on the road to homeownership starting today! Send me a text, call, or DM to set up a strategic plan that is perfect for you! (805) 827-0782 😊❤️🏡